Long Futures-Short Call (Covered Call)

The two protective synthetics added a bought option to a futures position. The covered call is different: it adds a written (short) option, which flips both the cash flow (premium collected, not paid) and the margin treatment. This is the last strategy in the unit, and the one where "downside protected" is a trap answer.

Long Future Plus Short Call

A speculator who is long futures sells (writes) a call against that position. The premium is collected up front.

• The premium is collected, not paid. That cash cushions the downside by the amount received and boosts the return in a flat-to-modestly-up market.
• The upside is capped at the short strike. Above the strike, the short call's losses cancel the long future's further gains, so the position stops making money past that level.
• The downside cushion is only partial. The premium offsets a decline just up to the amount collected. A large drop in the future still produces a loss, reduced by the premium but not eliminated.

Trace the outcomes:

• Market rises past the strike → future gains, short call loses the excess → gains capped at the strike.
• Market flat to slightly up → future roughly flat, call expires → keep the premium as extra return.
• Market falls a little → future loses, premium offsets it → cushioned, up to the premium.
• Market falls a lot → future loses heavily, premium covers only part → still a net loss.

The name to use on the exam is the covered call. Its payoff profile is that of a synthetic short put, and a question may note that, but the tested label is "covered call."

Think of it this way: writing the call is renting out the upside of a future you own. The rent (the premium) is yours to keep and softens a small dip, but you have promised away any gain above the strike, and the rent does not come close to covering a big fall. It is an income-and-cushion play, not a hedge.

Exam Tip: Gotchas

• A covered call gives PARTIAL downside protection, not a floor. The premium cushions a decline only up to the amount collected. A large drop still loses money, net of the premium. An answer that calls the covered call "fully hedged" or "downside-protected" is wrong.
• The upside is capped at the short strike. Past the strike, the written call's losses cancel the future's further gains. The covered call trades away the unlimited upside for premium income; it does not keep the rally.
• Use "covered call," not "synthetic short put," as the answer. The payoff equals a synthetic short put, but NFA's tested label is the covered call. When both appear as choices, pick the covered call.

Equity and Margin: Keep the Two Cases Distinct

Whether a strategy posts margin depends on whether it is built from a bought option or a written one. The two cases must not be blended.

• Bought-option strategies post no margin. The long call and long put (the two substitutes) and the protective legs that add a bought option all have the same treatment: the premium is the only outlay and the only capital at risk, so the premium is the ROE denominator. No performance-bond margin is posted, because the buyer is not short anything.
• The covered call is a margined position. It contains a short call and a long future. The future is margined, and the short call is covered by that long future. So a covered call's return uses a margin-based denominator from the speculating chapter's calculations unit, not a bare premium.

Exam Tip: Gotchas

• A bought option's ROE divides by the premium; the covered call's does not. The long call, long put, and protective legs post no margin, so the premium is their equity base. The covered call carries margin on the long future, so its return uses a margin denominator. Applying the bare-premium ROE to a covered call is the wrong base.
• "Covered" means the future covers the short call, not that margin is waived. The long future backs the written call, but the position is still margined on the futures side. Do not treat the covered call as a no-margin, premium-only position the way a bought option is.